Geopolitical Tensions! Would Gold Continue to Struggle... - Outside View by PersonalFN

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Geopolitical Tensions! Would Gold Continue to Struggle...
Aug 22, 2014

Global uncertainties have not receded, yet gold appears to have lost steam. Two months ago, Iraq crisis threatened to put global economy at a great risk. However, as guns cooled down in Iraq, global economy breathed a sigh of relief. Crude oil had jumped due to unrest in Iraq. But later fell sharply when it became almost certain that oil supply won't be affected much. Geopolitical tensions didn't end there. Russian tussle with the U.S. and the European nations continued. The sanctions on Russia were believed to be getting stricter. Russian currency Ruble tumbled and investors moved out largely. Tensions between, Ukraine and Russia appear to be unresolved even now. Usually, gold climbs up under such conditions. It didn't this time.

Gold: Struggling to go up?
Data as on August 19, 2014
Gold Prices are in dollar terms for per troy ounce
(Source: ACE MF, PersonalFN Research)

Chart above shows that, gold is struggling to maintain gains. This suggests that gold goes up momentarily and probably just as a knee jerk reaction, but comes down subsequently as situation eases.

This has been the case mainly because a few fundamental factors are not favourable for gold.

Why is gold down?

  • Weak demand from China

  • Curbs on gold imports in India

  • Strong Dollar

  • Improving Job and housing market conditions in the U.S.

  • Possibility of withdrawal of stimulus packages in the U.S.

  • Strong equity markets
It is clear that, gold prices are under pressure mainly because of weaker demand and lesser fundamental triggers. While Gold demand has been weak in China, the result of ongoing import curbs in India has kept the demand weak. Moreover, dollar has been rising against the basket of major currencies of the world as measured by the dollar index. The Federal Reserve (Fed) in the U.S., in its latest meeting, has given no clear deadline for withdrawing stimulus packages completely. However, it is widely believed that, before the end of 2014, we might see an end of bond buying programme of Mortgage Backed Securities (MBS). This may further make gold less attractive.

PersonalFN is of the view that, for now gold looks under pressure. If global tensions recede, there is a chance that gold prices might slip further. Till then, fall in gold prices appear to be arrested. PersonalFN believes, for investors in India, movement of rupee would matter a lot. Usually Indian Rupee is weak when dollar is strong. This may provide some cushion to Indian investors.

The kind of gains made in Gold between 2009 and 2012 may not be seen in near future if the U.S. economy keeps improving and Fed decides to raise interest rates in the U.S. For now, you shouldn't speculate on gold and take big bets. Speculation in any form may prove to be dangerous to your portfolio.

Having said this, PersonalFN is of the view that, you should continue to treat gold as a portfolio diversifier and keep about 10% to 15% of your portfolio in Gold. Following a proper asset allocation that suits your financial plan would be helpful.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund Research Firm known for offering unbiased and honest opinion on investing.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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